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Crypto Arbitrage

Written By

Jemma Grist

Written By

Jemma Grist

Jemma is a writer, editor and fact-checker focused on retail trading and investing. Jemma brings a unique perspective to the forex, stock, and cryptocurrency markets and works across several investment websites as a researcher and broker analyst.

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Edited By

William Berg

Edited By

William Berg

William contributes to several investment websites, leveraging his experience as a consultant for IPOs in the Nordic market and background providing localization for forex trading software. William has worked as a writer and fact-checker for a long row of financial publications.

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Fact Checked By

Tobias Robinson

Fact Checked By

Tobias Robinson

Tobias is a partner at DayTrading.com, director of a UK limited company and active trader. He has over 25 years of experience in the financial industry and contributed via CySec to the regulatory response to digital options and CFD trading in Europe. Toby’s expertise and dedication to financial education make him a trusted voice in the industry, including a BBC investigation into digital options.

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Updated

Jul 24, 2024

Crypto arbitrage allows traders to exploit inefficiencies in the market. It is a surprisingly simple concept with opportunities cropping up many times a day. Read on to find out the meaning of cryptocurrency arbitrage, its benefits, risks and the useful tools available to help generate profits.

What Is Crypto Arbitrage?

Cryptocurrency arbitrage is a specific form of financial arbitrage that capitalises on crypto volatility, liquidity and decentralisation. Arbitrage trading is a strategy that takes advantage of market inefficiencies and price differences across different markets and/or assets. Specifically, it looks carefully at the rates offered by exchanges to find ways to make a profit by quickly trading in a loop.

Different exchanges will have different numbers of buyers and sellers, different trading preferences and different specialisms. This helps ensure that some inconsistencies occur between spot rates for different markets or instruments, such as Bitcoin.

Types Of Crypto Arbitrage

Spatial Crypto Arbitrage

Perhaps the simplest and most common method is spatial arbitrage. This involves looking at one instrument on two different exchanges. If these exchanges list the crypto at different prices, traders can buy from the cheaper exchange and immediately sell from the more expensive one, instantly making money from the discrepancy.

The easiest way to do this is to buy, let’s say Ethereum, from one exchange, transfer it to another and then sell it. Unfortunately, this is inefficient, both taking extra time to complete the transfer and incurring additional charges.

To avoid this issue, traders can hold their fiat currency in one exchange and their crypto in the other. When the opportunity presents itself, the same buy and sell order can be placed at the same time across the two exchanges. This would give the trader additional fiat currency while maintaining the same crypto capital. This method performs trades without transferring from one exchange to another, taking less time and incurring fewer fees.

Triangular Arbitrage

Triangular crypto arbitrage is a little more complex, involving three trades instead of two, all of which are usually carried out on the same exchange. This method looks at three different cryptos, trading through each of them until you are back to the original asset.

For example, a trader might spot an opportunity in Bitcoin and Ethereum exchange rates. They could then exchange their Bitcoin for Ethereum, which could then be traded for Ripple and finally back to Bitcoin. If the spot rates are inconsistent, the trader could end up with more Bitcoin than they had initially owned, despite trading around a loop.

Flash Loan Arbitrage

A slightly trickier form of crypto arbitrage, flash loan arbitrage, takes advantage of the advanced technology behind altcoins and lending approaches. Flash loans are instant cryptocurrency loans that allow traders to borrow large amounts of digital coins without any collateral. This presents a lending arbitrage opportunity to take advantage of differences in interest rates by flash loan providers.

Other Arbitrage Methods

Arbitrage goes beyond the strategies explained above, providing opportunities to traders both inside and outside of the altcoin world. Crypto derivatives arbitrage works in the same way as those, though it uses securities and derivatives of digital currencies, rather than the tokens themselves. One method that is common among hedge funds is to buy cheap stocks of companies before a merger when the market is inefficient and unsure.

Benefits Of Crypto Arbitrage

Fast Profits

Crypto arbitrage stands above many trading strategies in how quickly profits are realised. Exploiting the price inconsistencies over such short periods means that profits are made as soon as the transactions and trades have gone through.

Opportunities

Cryptos provide a wide range of arbitrage opportunities. With over 500 exchanges and more than 4,000 cryptocurrencies around the world, the likelihood of altcoin arbitrage opportunities presenting themselves is huge.

Volatility

One of the reasons for the popularity of cryptocurrencies in the trading world is the consistently high levels of volatility they demonstrate, even Bitcoin, which has been around for over a decade. The decentralisation and proof systems of cryptos help to ensure varying levels of supply and demand, keeping volatility high. This volatility is great for crypto arbitrage, as the more that prices change, the more likely it is that markets will show inconsistent rates.

Immaturity

The relative youth of cryptocurrencies and their development help create irregularities and disjointedness between exchanges as support networks are less well established. This increases the number of crypto arbitrage opportunities that are created.

Competition

While cryptocurrencies have shot up in popularity and fame, they are still traded significantly less than fiat currencies. This means that there is less competition for crypto arbitrage than there is for other, more popular financial instruments.

Price Differences

A major feature of crypto arbitrage versus regular arbitrage is the size of the price differences that appear. Digital currency inconsistencies tend to range from 3% to 5%, however, there are occasions when opportunities have been as large as 40%.

Risks Of Crypto Arbitrage

Regulation

While there are hundreds of crypto exchanges and thousands of currencies out there, some know your customer (KYC) regulatory restrictions may limit the number available to you. Some exchanges may require proof of identity or even an open bank account in that country before approving an account.

Fees

While it is a simple process to wrap your head around and try to calculate potential profits, fees could limit the profitability of arbitrage opportunities. Calculations should consider deposit and withdrawal fees, both in fiat and cryptocurrencies, as well as trading charges implemented by the exchange.

Security

While it is most profitable to store some assets on all your viable exchanges to reduce the overall time requirement, this can increase your security risk. Holding capital in many different wallets and accounts produces a larger risk of being hacked for at least one of them.

Volume Requirements

The relatively small profit percentages that are available with crypto arbitrage often mean that large amounts of capital are required for each opportunity to produce meaningful profits.

Timing

Crypto arbitrage opportunities are quick to appear and resolve. The short lives of these opportunities mean that traders must be on the ball to take advantage of them. This can be tricky, especially with the long transaction and verification times associated with crypto mining in some blockchains.

Crypto Arbitrage Bots

The need for low latency, calculations and trade placement can make crypto arbitrage a tricky business. Therefore, most traders have moved towards automated arbitrage, utilising bots (robots) and software tools to maximise their chances of success.

There are two routes that traders can go down with automated crypto arbitrage, purchasing a pre-made bot online or writing their own. There are many bots available on the internet, you may have heard of Dex Analysis. Each bot will have different specialisms and approaches, so traders should ensure they carry out detailed comparisons and fully understand the methods being implemented by a trading bot before entrusting their money to it. It is also a good idea to check reviews of arbitrage bots to check their returns are as stated.

For those Bitcoin traders who prefer to be more in control, all it takes is a little programming know-how and some time to develop your own bot. There are plenty of ‘how to’ guides and tutorials online for building trading bots and most crypto exchanges support APIs, which allow integration of home-written software. The development of a bot’s formula can be done relatively easily, with some capable of basing their actions on Excel spreadsheets and calculators.

Unfortunately, as is the way with all things, some resources online are a bit more malicious. Some trading forums, arbitrage signals providers and bots are attempting to take advantage of vulnerable traders. For example, the Crypto Arbitrage VIP software supposedly offers a 340% return, however, many reviewers have highlighted its illegitimate nature.

Crypto Arbitrage Software & Tools

Beyond the realm of automated trading bots, crypto arbitrage can be supplemented and aided with many other tools and pieces of software. Many companies offer a range of additional services, such as live charts, scanners and finders that monitor and screen opportunities, sending alerts to traders on helpful dashboards, such as the Telegram bot.

Crypto arbitrage can also be done without the use of a computer thanks to apps like Crypto Arbitrage Pro APK. These have in-built matrixes and calculators produced by experts that provide traders with a medium for checking opportunities wherever they go.

What To Look For In Crypto Arbitrage Platforms

An important consideration for prospective arbitrageurs is which platform would suit your needs. There is no objectively best crypto arbitrage website or platform, as every trader will have different needs, and there are many available.

While you could work over many general platforms, assessing profitability across several windows, this is a slow process. It is often better to find a platform that is connected to a range of platforms, allowing the much easier establishment of arbitrage opportunities.

The top platforms will also support automated arbitrage, either with dedicated APIs to support external bots or even built-in tools, trackers and auto trading bots that come with the platform.

To maximise profits, especially given the small margins of crypto arbitrage, traders should search for a platform with a range of deposit and withdrawal methods, as well as low fees. This allows traders to withdraw raw profits, instead of having to exchange again for withdrawable currencies.

Final Word

Cryptocurrency arbitrage is an opportunity for traders unlike any other. Traditional arbitrage has been declining with better networks and tighter regulations. The decentralisation of cryptocurrencies such as Bitcoin, however, provides consistent volatility and opportunity for those who know where to look.

Whether on a single exchange or over hundreds of them, traders can carry out crypto arbitrage manually or with the help of robots. However, care should always be taken when capital is at risk; ensure to read reviews, understand what is being offered and maintain the security of funds to make sure that profits are not jeopardised.

FAQ

Does Crypto Arbitrage Work And Is It Profitable?

Crypto arbitrage can work; its popularity is not baseless. It is important, however, to ensure that all fees are considered in profit calculations and to understand that there may well be times when the opportunity will close too quickly to be exploited.

Is Crypto Arbitrage Legitimate?

Many people doubt the legality of crypto arbitrage; however, it is perfectly legal as traders are simply capitalising on inefficiencies in the market. This is also beneficial as it helps to close these discrepancies quickly, improving the efficiency of crypto markets.

What Is A Crypto Arbitrage Bot?

Bots are pieces of software that are written to automate processes that would otherwise be time-consuming and difficult. Bots are generally written in Python for cryptocurrency arbitrage and can be found on the internet, sometimes even for free. Bots are especially useful for crypto arbitrage as there is such a small timeframe of profitability.

Where Can I Learn About Crypto Arbitrage?

There are many guides online that lay out crypto arbitrage, its various strategies and the algorithms that bots are based on. Some websites, like Crypto University, offer training courses, calculators and helpful YouTube videos.

Can You Carry Out Crypto Arbitrage In Nigeria?

Yes, crypto arbitrage is available in all countries with access to crypto exchanges, whether local or abroad. For example, a Korean trader could use the internet to assess an opportunity between exchanges in India and South Africa, so long as they can open accounts there.